Netflix gets a boost from new streaming customers

Jan. 23, 2013
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One of Netflix's iconic red envelopes. / Charles Krupa AP

by Roger Yu, USA TODAY

by Roger Yu, USA TODAY

Netflix surprised Wall Street on Wednesday by reporting an unexpected profit for the fourth quarter as newly acquired tablets and smart TVs prompted new customers to try its streaming video service.

The Los Gatos, Calif.-based company, which also has a DVD-by-mail service unit, said it eked out a profit of $8 million, or 13 cents a share, during the October-December period, vs. profit of $35 million, or 64 cents, a year earlier. Analysts had forecast a loss of 13 cents, according to Bloomberg.

Its revenue of $945 million was 7.8% higher than a year ago.

"They did surprisingly well with subscriber growth and profitability," says Barton Crockett, an analyst at Lazard Capital Markets. "They had more subscribers than ... most of us thought they would. ... And marketing costs came down."

Investors were paying close attention to the total number of new customers for its domestic streaming service. Netflix added 2 million new customers, improving from 1.16 million added in the third quarter. The service now draws 27 million customers in the U.S.

For all of 2012, Netflix added nearly 10 million users worldwide, bringing the total number of global streaming customers to more than 33 million.

"Our holiday season was particularly strong, driven by consumers buying new electronic devices, including tablets and smart TVs," Netflix CEO Reed Hastings wrote in a letter issued to shareholders.

Shares of Netflix rose 5.57% Wednesday and ended at $103.26. In after-hours trading, the stock rose 33.5% to $137.82.

In his letter, Hastings said growth in median hours viewed per member during the quarter underscores its "broad array of video choices" and vowed to invest more in content.

Streaming clearly remains Netflix's focus, as it anticipates profit from domestic streaming to be larger than the profit from DVDs for the first time in the current quarter. DVD memberships fell to 8.2 million in the fourth quarter from 8.6 million in the third, and 11.2 million in the fourth quarter of 2011.

As streaming allows customers to view content anytime, Netflix is betting on exclusive, original content to differentiate its library, even as its competitors are undertaking a similar strategy. "Over time as a group, we are likely to compete more like Showtime and HBO do today," Hastings wrote.

The company's budget for original content is "expected to consume more cash in the first quarter and then decrease in terms of cash use in second quarter forward," he wrote.

Crockett says Netflix doesn't need to spend more on content in the U.S. "Netflix spends enough money to have service people like," he says. But creating compelling shows people will talk about will be "a real big test," he says. "This is a new skill for Hastings."

Starting next month, it will show six exclusive series, including: House of Cards, a political drama starring Kevin Spacey; Hemlock Grove, a murder mystery set in Pennsylvania; Arrested Development, a revival of the Emmy-winning series that ended in 2006; Orange is the New Black, based on the comedic novel set in a women's prison; Derek, the latest series from Ricky Gervais; and Lilyhammer, a second season of last year's series starring Steve Van Zandt as an ex-mobster in Norway.